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Hundreds of Chinese businesses that became U.S.-listed stocks through a maneuver called a "reverse merger" now languish at penny-stock levels, down from tens of billions of dollars in aggregate market value a few years ago. Who's to blame? Ugly accusations abound.

The wind-power vendor
CleanTech Innovations
(ticker: CTEK.Pink Sheets) went to court in December complaining that Nasdaq delisted the company after CleanTech's financial advisor was mentioned in a purportedly "anti-China" story in Barron's ("Beware This Chinese Export," Aug. 28, 2010). A LiaoNing Province agency wrote the U.S. Commerce Department early this month and said CleanTech's delisting was "racially motivated," a charge Nasdaq has denied. Then, on Wednesday, Federal Bureau of Investigation agents raided the home and Wall Street office of CleanTech's advisor, Benjamin Wey, and carted away boxes of evidence for an investigation that federal prosecutors won't discuss. Barron's couldn't reach Wey or his firm, New York Global Group.

Separately, a Vancouver, B.C.-based operator of silver mines in China named
Silvercorp Metals
(SVM) said in December that Chinese law-enforcement agents had opened a criminal investigation to identify the anonymous shortsellers who called Silvercorp a fraud in reports published under the pseudonym "Alfred Little" (www.alfredlittle.com). The silver company says it has spent millions on investigations, and on a Website (www.silvercorpfightsshortanddistort.com) and libel suit filed in September in New York State Supreme Court in Manhattan.

Benjamin Wey's firm assisted Chinese businesses in getting U.S. stock-market listings. The FBI raided his home and his office last week.
Martin Kozlowski for Barron's

An affidavit filed by "Alfred Little" asked the court for permission to proceed anonymously "as a matter of personal safety" and because of threats and beatings allegedly suffered by Little's investment researchers and lawyers in China. But on Jan. 9, Silvercorp amended its complaint to allege that announcements submitted by "Alfred Little" to the information disseminator PR Newswire had been authorized and paid for by the 72-year old mother of the research director at Eos Holdings, a Vancouver investment firm. Silvercorp added the Eos researcher Zane Heilig and Eos founder and boss Jon R. Carnes to the list of libel defendants.

China finance experts said they were surprised Carnes was accused of being behind the "Alfred Little" short reports. Starting in 2004, Carnes and his Eos fund invested in private placements of a dozen U.S.-listed China companies, including Sinoenergy and
SkyPeople Fruit JuiceSPU 7.18018018018018%SkyPeople Fruit Juice Inc.U.S.: NasdaqUSD1.1897
0.07977.18018018018018%
/Date(1425419850926-0600)/
Volume (Delayed 15m)
:
48023
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3.199838622915546Market Cap
29593709.6022749
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(SPU). "Jon is one of the most experienced Western people in China that I know," says Drew Bernstein, a partner at the accounting firm Marcum Bernstein & Pinchuk, who once shared Beijing office space with Carnes. Bernstein says he's been told that most of Carnes' employees in China have been jailed and that Carnes is extremely worried for them. In an e-mail Tuesday, Carnes said, "I am just not able to comment on any of this."

The affidavit filed in September by "Alfred Little" in the Deer case says that lawyers hired to retrieve public records in China told him of being attacked. One was run off the road in October 2010 after obtaining a company's tax records. After pistol-whipping him, his assailants demanded the true name of Alfred Little, then told the lawyer to stop his investigation, claims the affidavit.

According to its Website, Eos "refocused" its investments on North America in January 2011 and in June it liquidated the fund and returned remaining cash to investors "due to the poor performance of our investments."

Silvercorp, Deer and Sino Clean fervidly deny the fraud allegations of the Alfred Little reports and say those reports were part of a manipulative "short and distort" scheme to drive down their shares. Asked about allegations of harassment in China, Silvercorp's lawyer in New York, Roger R. Crane, Jr., said, "The courts will decide."

OTHER SHORT INVESTORS WHO HAVE published reports alleging fraud have signed their names. Kevin Barnes and his Cheyenne, Wyo., fund Absaroka Capital are being sued in Cheyenne's federal court by SkyPeople Fruit Juice. Denying that his report was defamatory and counterclaiming for libel against SkyPeople (claims the company denies), Barnes filed affidavits by lawyers in China claiming that key pages of SkyPeople's government filings were suspiciously missing. Another affidavit from a Chinese attorney engaged by Barnes' lawyers at the U.S. firm Akin Gump alleged that he got a threatening phone call after examining tax filings of a SkyPeople subsidiary at another government office. In an e-mailed statement, Barnes said Absaroka will continue expressing opinions about publicly traded companies. "Sunlight and transparency are the best solution for the Chinese fraudcap (sic) problem that has infected U.S. capital markets," he wrote.

Peter Siris, a longtime investor in China through his Guerrilla Capital, laments that all U.S.-listed China small caps are being tarred with the bears' brush. "Some of these companies are great companies," Siris says. "Now the companies feel frustrated, the investors feel frustrated and…it's just sad."